Lincoln Electric Holdings Inc (LECO) 2006 Q4 法說會逐字稿

Good morning. My name is Lynn, and I will be your conference operator today. At this time I would like to welcome everyone to the Lincoln Electric Holdings 2006 fourth quarter year end conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr. Vincent Petrella, Chief Financial Officer. Please go ahead, sir.

Good morning, and thank you for joining us on our call today. We issued our earnings release prior to the market open which can be found through the investor tab on Lincoln's website or by contacting our Investor Relations office at 216-383-4893. John Stropki, Chairman and Chief Executive Officer is also on the call this morning and will have a company overview in the first part of our discussion today. Before turning the call over to John, however, let me remind you that certain statements made during this call and discussion may be forward-looking, and actual results may differ from our expectations. Risks and uncertainties that may affect our results are provided in our press release and in our SEC filings on form 10-K and 10-Q. Now here is John Stropki.

Thank you, Vince, and good morning to everyone joining us on the call. We've completed a record quarter and record year in 2006, achieving strong growth in most of the markets we serve. Looking at the quarter, net income increased 74% to $51.8 million or $1.20 per diluted share on sales of $506 million, an increase of 20%. Operating income for the quarter increased 56% to $59.2 million. That income for the fourth quarter includes non-recurring charges and a non reoccurring gain, and Vice will cover these in detail later. During the fourth quarter our global business continued to contribute strong sales and profit results. I am especially pleased with our continued progress in broadening our market position around the world, including the successful integration of Metrode which was acquired in October.

We look to maintain that momentum of our record 2006 performance into the 2007 as our global footprint provides us a unique opportunity to serve the many domestic and international growth markets within our industry sector. For the year net income increased 43% to $175 million or $4.07 per diluted share and operating income was up 56% to $233 million. Net income for 2006 includes non-recurring charges and a non-recurring gain which again Vince will detail in his comments. Excluding the non-recurring items, adjusted net income increased 52% to $171.3 million or $3.98 per diluted share in 2006.

Sales in 2006 increased 23% to $1.97 billion. Our North American operations had record sales of over $1.3 billion in 2006, representing an increase of 24%. Export sales in the year increased 57% to $154 million, driven by heavy demand for our high-technology products into the construction and energy related sectors. Lincoln sales outside of North America increased 22% to $666 million in local currencies and sales increased 18% in non U.S. operations in local currencies. Vince will review the numbers in detail in a moment, but first I would like to provide some detail to the quarter and the year in the regions.

First, North America. During the fourth quarter results in demand continued to be strong within our North American operations. Economically, industrial activity represented in key measures such as industrial production and capacity utilization across the factories in the United States and Canada, continue to provide a healthy operational environment compared to 2005. Although the comparisons to 2005 became more challenging during the latter part of the year. Key industries that we serve continued to generally show positive year-over-year growth.

In the U.S. total manufacturing industrial production excluding the high-tech segments was trending at 1.8%, ahead of 2005 as of December of 2006, while capacity utilization was running at approximately 80.5%. Whereas in Canada we saw continued softness in the automotive and related sectors but stronger demand in the oil and gas sectors. We continue to see investment in order patterns that would suggest that plant activity related to modernization or upgrading facilities to maintain this level of utilization remains positive. Order trends the fourth quarter continue to show favorable trends versus the prior year.

In terms of the economic outlook, 2007 will certainly be more challenging when evaluating year-over-year comparisons. Although the outlook in general terms are shaping up to be more positive than negative with the GDP forecast for 2007 now hovering near 3% for the year. Across most productlines and distribution channels we saw strong sales dollar results in growth over the very high levels in the 2005 fourth quarter, and we continue to maintain a healthy backlog going into 2007. Total growth for the quarter was driven primarily by volume increases as pricing was a lesser impact. However, we have had steady increases to address certain more volatile price dynamics in the metal markets which impact certain consumable product ranges.

Export sales growth for North America continues to be very strong with key infrastructure development projects demand our high-technology products. We are also continuing with the key strategic capital programs that are aimed at improving capacity, efficiency and driving cost reductions throughout all of our North American operations.

Turning to Europe, European economies in the industrial sectors in particular enjoyed growing strength in the fourth quarter. Raising 2006 full-year GDP growth estimates to 2.7% and resulting in the area posting its fastest growth rate since the year 2000. Driven by strong exports of capital goods, European economic performance continues to surpass expectations, and our regional companies are very active and are participating in the global infrastructure build underway. Although somewhat constrained by consumable capacity, Lincoln saw its business expand at a very healthy double-digit pace in the fourth quarter, which provides a strong finish to an excellent year in the region.

Total sales for the quarter in the region were roughly 30%. Although this number was aided by the October acquisition of Metrode, organic growth rates were very solid in most areas of the region. For the full-year 2006 sales growth reached approximately 20%, driven substantially by the Metrode acquisition, growth in Eastern Europe and strong exports to the global oil and gas sectors. For both the fourth quarter and fiscal year results the region also produced very good operating leverage with operating profit growth solidly outpacing sales growth. During the year the region made some important progress in addressing its most pressing capacity constraints by commissioning a second flux line at our French subsidiary and commencing the construction of a Greenfield flux-cored wire plant in Poland, which is already ahead of schedule and will come on stream in the first quarter of '07.

Economic activity continues to be robustly driven by both domestic and export orders. The forecast for 2007 and 2008 annual GDP growth rate for the regions are between 1.7% and 2.8%. These forecasted growth rates have been revised upward based on the overall demand and lower energy prices. In Russia the fourth quarter ended well with 2006 total sales in excess of $30 million, a 65% increase over prior year. The [VFTL] pipeline project which we've mentioned in other calls contributed about $8 million to that growth. Much of our business in Russia came from our strong presence in the energy sector, but we are also experiencing growth to the expanded product offerings from our Polish plants.

The outlook, the sales demand in the region remains strong in January, and we are well positioned to take full advantage of the economic improvement in the region and to capitalize on numerous business growth initiatives. In Latin America we closed 2006 with record sales for the fourth quarter and the year. In the quarter sales were up 25%. Full-year sales increased over 30%. These strong results were driven by our continued growth in the base market sales, as well as our success in capturing large-scale projects throughout the region. We also saw the Central American and Caribbean markets improve with strong sales in the quarter, capping an excellent growth year where total 2006 sales ended approximately 35% ahead of the prior year. Strengthening our market leading position in Central American, Caribbean region.

Lincoln also gained additional market share in the Latin America region during the year and ended the market leader in Mexico while also increasing our market position in all major markets in the region. In addition to growing market share we were very successful in sustaining good levels of average selling prices leading to strong margin leverage. Total GDP growth for the region in 2006 is estimated at a strong 4.7%, which is impressive considering that there were 10 presidential elections throughout the region, including most of the large economies, i.e. Mexico, Brazil, Venezuela, etc. Growth was led by favorable commodity prices, driving investments in mining, agricultural and oil related industries. The expansion in Torreon, Mexico announced early in the year was completed by year end as planned, and manufacturing equipment installations started in January. In December we also achieved ISO [14,000 1] certification at our two manufacturing facilities in Torreon. Our first factories in Latin America to achieve the ISO certification. Our plan is to have all of our facilities certified ISO 14,000 1 in the next three years.

Sales were also very strong in Venezuela with growth over 50% for the quarter driven by the energy sector demand, domestic demand due high liquidity in the market and our geographical infrastructure expansion in the country. Total 2006 sales grew an outstanding 45%. Oil related investments are driving the flux submerged arc wire and equipment sales, while high liquidity in the overall economy is driving sales of our small welding equipment. These drivers continued in the fourth quarter despite the presidential election held in December.

In Columbia we also achieved very good results for the year with sales more than doubling, driven by the acquisitions we made at the end of 2005. We remain with a positive outlook going into 2007 in light of the continuing demand for our products in the energy, automotive, mining and retail sectors and the increased contributions from the investments being paid in the Latin America region.

The Middle East and Africa, the region we saw a continuation of strong sales, driven by industries such as offshore platforms, pipe mills and pipelines all involving the extraction and transportation of oil and gas. In sub-Sahara area the welding business continues on a high double-digit growth pace from the energy related companies mining and manufacturing. The expansion of our worldwide product offering and solution selling has supported gains in market share throughout the entire Middle East and Africa region. Our investments in demonstration and training facilities are paying big dividends in this region. Sales in South Africa were up approximately 50% during 2006, and we were off to a great start in 2007. We are taking considerable share in this important market as we continue to expand our product offering of globally sourced welding equipment and consumables.

We also continue to experience significant increase in demand for both our equipment and consumable products into the energy rich areas of the Middle East. For example, we recently received orders for over 800 of our large industrial welders into that region. GDP growth for the Middle East Africa region in 2007 is expected to range between 5 and 6%. And although the region can be volatile both socially and economically, we are assuming steady growth for welding projects in the 2007 and 2008, based on real demand.

In Asia-Pacific our region continues its strong performance in the fourth quarter with increases in all key operating measures when compared to last year's quarter. Sales were up over 40% in the quarter resulting for the full-year were our positive sales rising over 30%. These results were driven primarily by leveraging volume through our operating entities as well as stronger sales of higher margins imported projects.

Overall 2006 sales in Greater China region increased approximately 40%. These improvements were driven by leveraging volume and growing our distributor base for both sales of domestic and imported products. Overall Lincoln imported product sales to greater China grew by 65% in the quarter with strong backlog heading into the first quarter of 2007. Our Shanghai factory sales mainly for flux-cored wire were up over 50% over 2005, and we've added the consumable line we mentioned in our last call and have also started the construction of the new 90,000 square foot building at our Shanghai site, which will enable us to double capacity for flux-cored wire consumables production. This capacity will come on incrementally throughout 2007.

We've also opened a sales branch and warehouse in Chengdu in the Sichuan province of China, making it our third China branch in addition to Guangzhou and Cogen Tianjin. We are also planning to add two additional branches during the first quarter of 2007, one in Xian and one in Harbin. GDP growth in China continues at near 11% rates. Given that, there continue to be some concern that the government will start to push for a mild slowdown to cool things off. Commodity prices, especially steel and copper continue to increase, though the rate of increase is stabilizing.

In other regions of South Pacific, South Korean sales in 2006 were a record, increasing over 100%. The shipbuilding market there remains very strong, providing opportunities for us to sell our Power Wave systems to upgrade production equipment and increase productivity. Lincoln's [nexwell] products are also gaining popularity for welding process improvements, such as aluminum tandem mid welding for fabrication of LNG vessels. We are also working closely with key fabricators to support the development of the overall process, both equipment and consumables. And we have opened a liaison office in South Korea and placed a highly qualified welding and process engineer there to work full-time in order to better support these initiatives.

In the South and Southeast Asia we continue to benefit from the [boob] in the offshore industry, particularly Southeast Asia. Sales in the region finished up 30% in the quarter with Singapore up 60%. Our new production line of welding consumables at our plant in Indonesia is at full capacity helped by lifting sales of over 40% this year. Lincoln Indonesia's low hydrogen products are benefiting from wide acceptance in the offshore fabrication sector, both in Southeast Asia and the Middle East.

And lastly, sales in India remain strong with sales of imported products increasing approximately 35% this year. Site preparation for our new consumable plant in Chennai has started with completion scheduled for the first quarter of 2008. That's the overview of the regions and the performance in the quarter and year. Now Vince will review the results in more detail.

Thank you, John. First let me begin by reviewing a few more key economic measures that we follow as indicators of the strength of our business. U.S. industrial production declined half a percent in January from the prior month but increased 2.6% year-over-year. Durable goods production decreased 1.3% in January and increased 3.3% over the prior year. The purchasing managers index dipped to 49.3 in January, the second time in the last three months with a reading below 50.

As John pointed out in his comments, non-U.S. economic data is generally a bit stronger. Although key U.S. macroeconomic data appears somewhat mixed and trending downward, overall we see continuing growth but at a slower rate than the past year. January and February orders and sales have grown at a double-digit pace, albeit at lower year-over-year growth levels.

Now to the results. The fourth quarter of 2006 represented our 12th consecutive quarter of strong earnings growth. The quarter's consolidated sales were up 20% with North American sales increasing 13% and sales reported outside of North America up 35%. Foreign currency effects increased reported sales by 3%, volume increases contributed a robust 13% to sales dollars in the quarter. Pricing had a minor impact on sales for the quarter, contributing 3% of the increase in sales dollars year-over-year. Acquisitions contributed about 1%. On a productline basis machine sales increased 15%, and consumable sales increased 24%. Sales by productline were approximately 60% consumables and 40% equipment compared to 58% consumables and 42% equipment in the prior year's same quarter.

The percent of gross profit in the quarter was 26.6% of sales compared with 27% in the prior year's same quarter. The decline in gross margin was primarily attributable to higher legal fees related to product liability defense costs, which reduced fourth quarter gross margins by approximately 50 basis points and startup and wind down costs associated with the closing and moving of a plant in Europe, which reduced margins another 20 basis points.

Fourth quarter gross margins were also affected by traditional plant shutdown periods. Full-year gross profit was 28% of sales compared to 27.3% of sales in the prior year. The year-over-year improvement in gross profit was primarily due to favorable operating leverage caused by our increased volume levels. Higher product liability defense costs reduced gross margins for the year by 40 basis points.

SG&A expense of $74.7 million includes a gain of $9 million on the sale of property in Ireland. Excluding this gain SG&A was 16.5% of sales compared to 17.4% of sales in the prior year after excluding a loss of $1.0 million on the sale of a business. The lower SG&A as a percentage of sales was primarily driven by strong volume leverage.

Incremental selling costs associated with higher sales volumes was the primary factor driving the dollar increase. Full-year SG&A of $315.8 million was 16% of sales, down 180 basis points from the prior year. Excluding nonrecurring items, SG&A was 16.5% of sales in 2006 compared with 17.7% of sales in 2005. Again, the lower SG&A as a percentage of sales was primarily driven by volume leverage and a predominantly fixed SG&A cost structure. In addition, the acquisition last year in '05 of J.W. Harris reduced SG&A as a percentage of sales by 30 basis points. Higher bonus costs, the incremental SG&A associated with acquisitions and higher selling expenses were the primary factors driving the dollar increase.

Fourth quarter operating income at 11.7% of sales was up 270 basis points versus the fourth quarter of 2005. Operating income increased 56% in the quarter. As previously noted, the company realized a gain of $9 million on the sale of property in Ireland. The quarter also included half $0.5 million of charges related to continuing European rationalization efforts. Excluding these items, fourth quarter operating profit margins would have been 10%.

In addition, higher legal fees primarily related to product liability defense costs, as well as startup and wind down costs of manufacturing operations in Europe, reduced operating profit by 90 basis points. Full-year operating income rose to 11.8% of sales from 9.4% in 2005, an increase of 240 basis points. Full-year operating income increased 55% in 2006. The year included rationalization charges totaling $3.5 million related to the previously noted European rationalization effort. Excluding these charges and the gain from the sale of property, operating margins would have been 11.5%.

The prior year also included rationalization charges amounting to $1.8 million and a $1.9 million loss related to the sale of a business. Without these charges, prior years' operating profit margins would have been 9.6%. Full-year 2005 also included a $1.4 million pretax, $900,000 after-tax or $0.02 per share income related to the settlement of legal disputes. The income tax provision for the fourth quarter reflected an effective tax rate of 16% compared to 21.8% in 2005. The quarter included a tax benefit of $1.8 million related to the renewal of the R&D tax credit.

The quarter also benefited from the low tax rate associated with the gain on the sale of property in Ireland. The full-year effective tax rate was 26.5% compared to 20.5% in the prior year. The higher effective tax rate was due to higher income levels and the prior year's onetime tax benefit of $11.7 million.

The company invested $76 million in capital expenditures for the year compared with $50 million in the prior year. The 2007 capital spending plan will continue to focus on our capacity expansions, as well as improvements in the cost base. We expect to invest another $70 to $75 million on capital projects in '07, further expanding our global capacity and improving manufacturing efficiencies. Other uses of cash flows for 2006 included the payment of $32 million of dividends to shareholders.

We also invested $25 million in acquisitions in 2006 compared with $78 million of acquisitions in 2005. Our weighted average diluted shares outstanding increased to 43,239,000 shares for the fourth quarter compared with 42,539,000 shares for the fourth quarter of 2005, a 1.6% increase. Shares outstanding at the end of 2006 were 42,806,000 shares.

Our return on invested capital rose to 19.9% at December 31, 2006 compared with 17.6% at December 31, 2005. The increase in returns is reflective of our much higher operating income. The company closed the quarter with $41 million of net debt, including $120 million in cash.

At this point I would like to open the call for any questions.

(OPERATOR INSTRUCTIONS) James Bank, Sidoti & Co.

Good morning. First question is if you could help me a little more with the tax credit you got in the fourth quarter, $1.8 million for R&D tax benefits. And I'm sorry what was the second part to that?

The second part was the low tax rate on the $9 million gain associated with our sale of property in Ireland. So that reduces our effective tax rate because it is taxed at a much lower rate than our statutory rates. But the $1.8 million related to the R&D tax credit was the impact of not reporting a benefit during the course of 2006, because the legislation had expired on the research and development tax credit in the U.S. before 2006. And the President in the fourth quarter signed and renewed the legislation that had been presented by Congress. So we didn't have in the first three quarters of the year any benefits associated with our traditional research and development tax credit program and recognized the whole of that amount in the fourth quarter.

Okay. I understand; so the rough average of maybe 29% would have come down a little bit more for the prior three quarters. I am just trying to get at what would have been a normal tax rate if we were able to exclude this? I am just trying to get more of a normalized earnings per share in the fourth quarter.

I would look to what our full year rate was and then adjust it a little bit upwards for fourth quarter adjustments that we had associated with, for example the sale of the property. I would put sort of the run rate for 2006 at around 28%.

28, okay. Moving into your sales, Europe, are you able to break down the dollar amount? I think I heard John mention up 30%?

Break it down by --

Just the dollar amount, if you could split Europe between your other regions, other countries. I didn't see it was split in the press release unless I missed it.

No. It wasn't. The European sales are up around $26 million in the quarter year-over-year.

All right. I'll back into the other one, then.

That will be in our -- James, that will be in our 10-K that we file hopefully later today.

Now your margins, it looks like it was a little bit light on gross at least from what I was estimating, but then you beat on operating margin understand some of the extraordinary charges in the fourth quarter added to that. I am just trying to get what sort of normal run rate would be going forward into '07; what we should be looking at.

As I pointed out in my comments, James, we were affected by the higher legal fees and the higher costs associated with the transition of some manufacturing operations in Europe. And I would expect us to have a higher gross margin in the first quarter of 2007 than what we had in the fourth quarter of 2006.

Okay, and then your op margins I think you said it was roughly or your total SG&A to sales was roughly 16, 16.5. That seems to be sort of the run rate that you had in '06. Is that something we should be looking at for '07?

Yes, we think that is a pretty good run rate going forward considering our -- the conditions that we are facing currently.

And then in terms of going back to sales, you had some mention on North America. It seems like some of the macros are a little bit lumpy, IP has been mixed since July somewhat trending downward even though it is up year-over-year. And North America being really the major contributor to your top line we understand that international is very, very strong, but is there any -- do you offer the backlog number or what the order rate is? Or it was just what you provided in terms of saying it was strong and healthy?

We do not provide a backlog number. Our backlog is generally a very short period of time because we take orders, book orders and turn those around pretty quickly.

Okay.

But we do see is relatively strong order levels around the world in January and February.

Is there anything else you are able to add on North America? I mean understanding going into '07 we are seeing a little bit difficult comps top and bottom line. And then I am just trying to get a sense of where we're going with North America because it doesn't look like.

I think clearly, based on what we've seen in the fourth quarter and then moving into the new year and I'll let John add to this as he sees fit, is that the North American comps are starting to slow down a bit in terms of the year-over-year growth rates. But non-U.S. comps seem to be just as strong as what we've seen in the last couple years. Our exports are very strong out of the U.S. Our non-U.S. locales, including Asia-Pacific and Latin America and Europe are as strong as they have been. And the North American business is perhaps from a year-over-year comparison basis not achieving the same kind of comps that we saw in 2006.

Okay. Thank you very much.

The one point I would make, James, is just to clarify something that you said. On the top line our sales revenues now are approximate 50-50 North America and rest of the world. So as we are seeing this acceleration and very strong growth in the international markets, that will help to mitigate any slower growth that we would experience in the U.S. market or the North America market.

Okay, good because I understand you guys don't give quarterly or yearly numerical guidance. I am just trying to get a feel for what your outlook is and it seems to be positive and if there is North American moderation then we will see sort of an offset internationally, if you will. Gentlemen? I didn't know -- were you able to comment on that or no?

I would say that is certainly the case, that we see continuing very strong non-U.S. growth and somewhat lower growth pattern in the U.S. But I would also add to John and your comments, James, that North America is still very strong for us, but we are not seeing the same kind of year-over-year comps that we had in the last couple years.

Right, not the 40%, 30% but still showing growth. Okay. Thank you.

Steve Barger, KeyBanc Capital Markets.

Good morning, guys. This is actually Joe Box on for Steve. I just have a quick question about the networking capital versus the increase in sales. Can you just give us a little bit more granularity on that and maybe is any of that actually due to the increase in exports from North America?

It certainly is related to our non-U.S. businesses, not necessarily the exports from North America from a third party basis, but our relationship from North America with our subsidiary operations and our intercompany relationships, there is a great deal of our business that is sold from North America into our non-U.S. units. And as that continues to grow more rapidly there is obviously a need in working capital to have higher inventory levels. And if there is an area in working capital that has had the greatest growth in dollar value it is certainly on the inventory side. Those sales are also translating into accounts receivable that tend to have somewhat higher DSO days, as well. So as we shift and grow more rapidly in non-U.S. markets, as we build our inventory needs in those markets, as well as the resulting accounts receivable balances, you see some growth in the working capital component. We are working very hard and have important performance objectives to manage our working capital as efficiently as possible. So we have a lot of activities that are working at managing working capital down as best we can in the light of the headwinds that we face in our global expansion plans.

Excellent. That is great color. Thanks. You also mentioned on your last call that you expected to push through some price increases in early '07. Could you just give us some color on that and maybe how the moderation in the North American markets might impact your ability?

We have instituted price increases for both equipment and consumables in all markets, particularly the North American market and the export products that come from the North American market. And that was done in the middle of January, and we expect that that will hold because those price increases were coupled with the commensurate cost increases. And we've seen other welding manufacturers have the same issues and react the same way.

Thank you. I'll hop back in the queue then.

(OPERATOR INSTRUCTIONS)

I guess it comes right back to me. Can you guys just give us some color on maybe some of your energy end markets? I know you talked a little about some of the pipelines, but is there anything coming up, any potential wins or any wins that you had over the quarter?

I mentioned the big Russian pipeline project, which is still very active. That project is my guess would be 25% of the way through, and we will continue to benefit strongly from both the consumable and equipment sales into that project. That being said, that is just one of a very few number of projects that are taking place all over the world. Several weeks ago I was in Singapore and visited a number of the offshore facilities in Batam Island there that are just have explosive kind of growth and are looking for ways to improve productivity and drive down their costs. And they are choosing Lincoln as a strong partner in many of those projects to do that. It really is a global phenomenon that I think changes the entire outlook of what the welding business is going to look like for the foreseeable future in our view. That there are so many of these projects and so much demand that the future looks very, very bright in all regions of energy-related developments, transportation and extraction.

Do you guys have any sort of estimate on market share maybe global market share for the energy business?

From a Lincoln perspective?

Yes.

I would just say that that has been, has been and continues to be one of our strongest sectors across all regions of the world.

I guess also from an end market perspective then how does the construction equipment business seem to be performing? Are you seeing any impact right now from residential or nonresidential?

I think if you follow the discussions from the manufacturers, Caterpillars and the John Deere's of the world the residential construction equipment sales has dropped a bit, but those are generally their smaller end machines. And they have had a commensurate strength in the large machine sales that are really, quite frankly, more important to us. So the trade-off on the low end for the growth in the big end is I would view as being a positive factor from our perspective.

Excellent. That is all I had today, guys. Thanks for your time.

Bradley Amoils, Axiom International Investments.

Thank you. Good morning. Two questions. First of all with regard to pricing I'm not sure how much granularity you give, but if you could give us some color on the price increases. And if you can put a number on it just compare it how it has been historically. And the second question I have is with regard to European markets particularly infrastructure in Germany and whether you are seeing any signs of particular upturn in those two markets.

On the pricing side I would say a 3 to 5% kind of a range, a little less on some of the more common welding consumables and a little bit more on the higher value added welding equipment where copper has had a pretty significant impact on the cost side.

And how does that compare to sort of your last couple of price increases?

It is probably more moderate than some of the consumable increases where the steel prices were changing so radically that we were doing more frequent and larger. On the equipment side I would say it is pretty consistent with what our strategy has been for a number of years.

Thank you.

And then your question again as it related to Germany, can you rephrase that again?

Yes, particularly with regards to Germany, Europe in general but more specifically Germany. And we are starting to see a lot of construction upturn and particularly larger industrial projects. And I am just wondering if that market from your point of view is actually showing material growth compared to a very sluggish market for many years.

I think we commented we are quite bullish on the European market, both the traditional Western European markets, but particularly Eastern European markets where we are investing quite heavily in additional capacity in both the products and in equipment.

That is very helpful. Thank you.

Marty Pollack, NWQ Investment Management.

Quick one if I may just on gross margin trend. Any possibility here that outside of the start of maybe legal fees, are you experiencing any other any inefficiencies? In all that might explain a little bit of those leaks in margin. And then looking forward do you expect because of the mix shift was higher and products; can we push that gross margin up further on a secular basis?

Yes, as far as the first part of your question we don't have we believe any significant inefficiencies that affected our gross margins in the fourth quarter. As I pointed out in my comments, without the acceleration and higher legal fees and the start up costs associated with a very unique and narrow situation in Europe where we are moving a plant, our margins in the fourth quarter were actually higher than the previous year's fourth quarter. As far as fourth quarter margins are concerned vis-a-vis the other three quarters of the year we tend to have lower margins in the fourth quarter because of shutdown activities in most parts of the world. So we would expect to see a lower margin compared to the overall year in the fourth quarter.

We would also expect to see our margins climb again in the first quarter of 2007, although we will have some continuing startup costs associated with our European manufacturing plant move. That should tail off at the end of the first quarter, and that will be behind us running into the second quarter of 2007. So we think that the expectations would be that looking at full year and first, second quarter type margins compared to '07 we ought to see some incremental increases from the continuing growth in the business, the leverage from higher volumes. And as we move towards fully manufacturing at some of our newer plant addition locations some overhead recovery and absorption and efficiencies from that perspective.

And just as far as the overall mix shift I guess more international and higher end moving a little more higher end product, expect a secular move that would essentially any chance you're going back to the early decade margin gross margin (inaudible) are those numbers out of sight so that will there still be a push towards the higher margin?

I can't hear you very well.

With regard to the further push in margins further up towards the more historical type margins back in the early decade 30 plus range.

I think we certainly can continue to increase our margins to that type of range over the longer-term. In the intermediate and shorter term, however, as we accelerate our global footprint, add new manufacturing capacity, expand our market share in non North American regions of the world we will continue to have some headwinds in achieving those types of goals. We are fairly satisfied with how well we've been able to manage our margins in the light of a fairly rapidly expanding non-U.S. markets. And even in the light of growing international business which tends to attract somewhat lower margins in North America we have still been able to increase our margins in this latest upturn. So from a longer-term perspective we fully expect to achieve margins that we were able to achieve in the late '90s when we were more of a North American business, and did not have the extensive growth and expansion of our global footprint.

Thank you.

Holden Lewis, BB&T Capital Markets.

First where there any shortages or anything like that of product during the quarter or were you largely able to sort of deliver as needed?

I would say largely we delivered as needed. I did comment the fact that we had a couple areas in our European businesses and we had seen these coming where we were adding capacity in the area of flux, and we are now adding capacity in the cord wire areas that put some strain on our deliveries. But more importantly put some strain on our ability to grow as quickly as we would have chosen to. From an overall North American perspective spot thing here and there but nothing of any significant or consequence at all and to think if you look at our growth in the market versus our competitors growth in the market you will see that we did quite well in overall aggregate forums.

To make sure I heard some of your gross margin comments there correctly you said that in the quarter the higher legal fees hurt the gross margin by 50 basis points but for the year it was 40 basis points?

Yes.

Is that right?

Yes.

And then the startup and wind down costs for the quarter were about 20 basis points.

Yes.

And 90 basis points for the year. So I guess as I look at the gross margin you had throughout the year, the first three months or the first three quarters of the year you had significant year-over-year increases. And then that stepped into a modest year-over-year decline in Q4 which doesn't seem like it is explained by the legal fees since that was kind of consistent with the full year and the closing of Ireland in the quarter doesn't seen to fully explain it. It seems like all year you'd been enjoying better year-over-year gross margins, and in Q4 that wouldn't have been the case. So I guess I am kind of looking for an explanation beyond those two items that you referenced for the shift in year-over-year trend.

Well, we did achieve higher gross margins in the first three quarters of the year compared to the prior year, and the explanation of the legal fees and the startup costs do show that we had higher gross margins in the fourth quarter versus the prior years fourth quarter, albeit at not quite the spread that we achieved in the first nine months of the year. We did have some greater changes in mix where our growth in non-U.S. markets holding particularly in the consumables side of the business, which have lower margins in North America affected our gross margins.

We had longer shutdown periods in most of our businesses as compared to the prior year, which affected some of our absorption. And then finally, the acquisition that we did that was included in the fourth quarter results in '06 compared with '05 out of the box because of purchase accounting requirements did not contribute gross margin to speak of, and that helped dilute a little bit our gross margin. The first quarter will not have this purchase accounting effect from the acquisition that we did in Europe, which should aid us going forward to have a better run rate on margins. And I expect us to be looking at the same kind of margins in the first quarter that we were able to achieve in the prior year's first quarter with some incremental improvement.

And then on the SG&A you did a great job I think leveraging the SG&A this year and I guess your guidance was with the investments that you're doing this is probably a reasonable level to look at. You're making investments throughout 2006 and a lot of those have perhaps wound up, but unless you are incrementally having even greater investments in '07 than '06 that is not my impression; why wouldn't you think you wouldn't be able to lever that line a bit more in '07 with the volume anticipation you have?

We will be continuing to have greater investments in '07, as compared with '06. As John pointed out in some of his comments, we are rapidly adding branch locations and selling capabilities in Asia particularly in China, and we continue to grow our selling infrastructure to handle these much higher selling levels, particularly in non-U.S. markets. I will say that I hope that the addition of the selling and infrastructure needs in non-U.S. markets will not grow as rapidly as the sales do. But our experience would show that the spending tends to get ahead of the achievement of the higher sales and profitability level. So we are going to see some continuing growth in particularly the selling line item going through 2007, certainly.

All right, great. Thanks, guys.

Walter Liptak, Barrington.

Good morning and congratulations on a good year. Vince, I wonder if you could quantify that purchase accounting adjustment that you just mentioned in millions of dollars.

It was less than $0.01 a share.

Okay, and then I don't know if you talked yet about pricing or price increases. It seems like some material costs are stable, some are moving up. Have you raised prices yet this year for machines or consumables?

Yes we did both in mid-January.

Can you mention the average percent increase?

I think I said 3% to 5% depending on the product. (multiple speakers) And then the one area that we watch daily is on the real high value metals, the nickels, the chromes, aluminum, copper, those kind of products and we look at those both from the equipment and consumable side. And the real high value ones we have surcharges that reflect any kind of increases that come from the metals markets and we do that monthly. So we are pretty well in tune with those kind of deals and that is a regular process.

Okay.

At this time there are no further questions. I will turn the call back over to Mr. Petrella for closing remarks.

Thank you, Lynn, and thank you all for joining us today. We look forward to talking to you all about our first quarter results late in April. Thank you very much.

This concludes the Lincoln Electric Holdings 2006 fourth quarter year end conference call. You may now disconnect.